A producer of pottery is considering the addition of a new plant to absorb the b

Question

A producer of pottery is considering the addition of a new plant to absorb the backlog of demand that now exists. The primary location being considered will have fixed costs of $10,456 per month and variable costs of $0.79 per unit produced. Each item is sold to retailers at a price that averages $0.92

a) The volume per month is required in order to break even =        (in whole number)

b) The profit or loss would be realized on a monthly volume of 61,000 units =       

c) The volume is needed to obtain a profit of $16,000 per month =        (in whole number)

d) The volume is needed to provide revenue of $23,000 per month =        (in whole number)

Explanation / Answer

a. Fixed cost/month FC = $10456

Variable cost/unit VC = $0.79, Sellijng price/ unit S = $0.92/unit

Thus, break even point BEP = FC/(S-VC) = 10456/(0.92-0.79) = 80430.77 units ~ 80431 units (ANS)

b. Profit/Loss at 61000 units/month

Now as BEP = 80431 units, thus there would be a loss at 61000 units

Now, total cost = 10456 + 61000*0.79 [Fixed cost + Variable cost]

Total revenue = 61000*0.92

Thus, Loss = Total revenue - Total cost

= 61000*0.92 - 10456 - 61000*0.79 = 61000*0.13 - 10456 = -$2526

There would be a loss of $2526/month. (ANS)

c. Volume needed to obtain a profit of $16000/month

Let Volume be X

Now, Total cost = 10456 + X*0.79

Total revenue = X*0.92

Thus, Profit = Total revenue - Total cost

or, 16000 = X*0.92 - 10456 - X*0.79

or, 16000 = X*0.13 - 10456

or, 26456 = X*0.13

or, X = 203507.7 units ~ 203508 units (ANS)

Thus, for obtaining a profit of $16000, 203508 units have to be manufactured

d. Volume needed to provide a revenue of $23000/month = $23000/0.92

= 25000 units (ANS)

25000 units need to be manufactured to obtain a revenue of $23000/month

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